Everything goes wrong in the Year of the Gengzi. Though China did not take the measure adopted by the US, Japan and European countries to provide nationals with cash subsidies, its economy has rebounded after a downslide of 6% in the first quarter and is expected to reach a growth rate of 2% at the end of the year. What contributes to China’s economic growth? Put it simply: borrowing money.

With productions paralyzed by the coronavirus epidemic, resumption of work hindered by flooding, windfall period of real estate business over and local coffers being out at the elbows, local governments have their year-on-year debts increased, hence not being able to hand cash out to the public like what developed countries did.

Family debts have soared by a big margin. In October, a report by the International Monetary Fund(IMF) pointed out that in the first half of 2020, the growth rate of family debts in China was 13.5%, higher than that of corporate loans and the average growth rate of family debts in emerging markets. Meanwhile, the growth rate of corporate loans in the US in the same period was about 17% while that of family debts was only 1%.

Recently, the China Monetary Policy Report Quarter Three made public by China’s central bank has verified the figures by the IMF. Up to September, in comparison with the beginning of the year, the balance of family debts was 61.4431 trillion yuan, having increased by14.7%, and the increased amount of loans was 6.1241 trillion yuan, 446.4 billion more than that in the same period last year. Now it is universally known that 600 million people are earning less than 1,000 yuan monthly while almost 1 billion people are earning less than 2,000 yuan a month. It means everyone among the 14 billion people is liable for 43.89 thousand yuan on average.

Broad money, M2, in China is first in world, but a huge amount of saving does not amount to Chinese people being affluent. China’s M2 is mainly derived from loans. In layman’s term, an amount of 1 million yuan you borrow from a bank is not necessarily withdrawn or transferred, but can be deposited at the bank, then the bank will lend out 800 thousand from the 1 million; the loop goes on to create the saving.

Growth rate of corporate loans is faster, so more of it flow into the real economy. At the end of September, the balance of loans in foreign currencies at financial institutions was 175.5 trillion yuan, having increased by 12.8% as compared with last year, by 16.9 trillion yuan as compared with the beginning of the year, and by 3,100 billion yuan on a yearly basis. It is worth noting that the medium and long-term growth rate of manufacturing industry was 30.5%, ascending in 11 consecutive months, while the amount of loans at non-banking financial institutions was 510.7 billion with a growth rate of -35.5%. This is a comparatively positive signal: loans have become part of money circulation in the real economy.

Colossal private financing has shaped into a monster. At the end of September, the total amount of private financing reached 280.07 trillion, having grown by 13.5% on a yearly basis. If the number is averaged, it amounts to a loan of 200 thousand yuan per head from financial institutions. Not only do the masses run short of money, but also treasuries at different levels find it difficult to make ends meet. The statistics by the central bank has indicated that government bonds were worth 44.46 trillion, having risen by 20.2%. It has shown the financial plight various local governments are in.

I wrote an article titled “Everyone is short of money except the central bank” in the first quarter of the year. It seems I was right. But how did the central bank fling the money into the society to resuscitate the economy? Firstly, the required cash reserve ratio was lowered. The central bank has leveled down the ratio three times this year to release a long-term bankroll worth 1.75 trillion yuan. Besides, it facilitated lending at banking financial institutions with various means. At the end of September, the balance of facilitated medium-term loans was 4.1 trillion yuan, having expanded by 0.41 trillion as compared to the beginning of year. Moreover, reloan and rebate of 1.8 trillion yuan was conducted by the central bank.

By and large, central banks in different countries do not directly lend out money to a real economy, but do it via banks and financial institutions. A central bank can materialize its intent through guidance or favorable policies. China’s central bank has been innovative this year, founding on June 1 two monetary policy tools that directly reach the real economy: loans extension and credit loans in support of and favorable for small and micro enterprises.

A report by the central bank alleged that departments of financial management guide financial branches to concede profit making to the real economy through intensifying the LPR reform to cut down lending rates, implementing the two monetary policy tools that directly reach the real economy and lessening charges, etc. It is estimated that at the end of October, profits worth 1.25 trillion yuan had been conceded, and with various measures further carried out, a total amount of profits worth 1.5 trillion yuan will have been conceded by the end of this year.

Over the past three quarters, fiscal revenue has been reduced. Estimated income from the public was 14.1 trillion yuan, having decreased by 6.4% year on year, among which the tax revenue was 11.9 trillion, having shrunk by 6.4% year on year. Though most of the revenue from different tax items fell off, the income from personal income tax shot up by 7.3%, having risen by 7.3% year on year. It has once again proved that raising taxable income threshold does not diminish personal income tax while dropping tax rates can really abate it.

Generally speaking, China’s economy is driven by debts, and has plunged into a predicament. Only cutbacks in personnel and reduction of taxes and charges can get it out of the financial stalemate to mitigate pressure on the monetary policy tools.

(He Jiang-bing, Chinese academic in Financial Studies)

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